Three former executives of Homestore.com, the USA’s largest online real estate company, have agreed to plead guilty to falsely inflating the company’s earnings, the Justice Department announced Wednesday. The transactions apparently involved AOL Time Warner’s America Online unit.
To meet Wall Street estimates, the company engaged in a complex series of ad deals in which it recognized its own cash as revenue, prosecutors said.
”Whether you are an executive at a Fortune 100 firm or an Internet start-up, if you victimize investors and employees, you will face investigation, prosecution and prison for your crimes,” Attorney General John Ashcroft said at a news conference.
John Giesecke, Homestore’s former chief operating officer, was charged with wire fraud and conspiracy to commit securities fraud. Former chief financial officer Joseph Shew was charged with conspiracy to commit securities fraud. Ex-vice president John DeSimone was charged with illegal inside trading.
The three have agreed to cooperate with Justice. Prosecutors want their help as they probe the role of AOL in the deals, say people familiar with the matter. They are also seeking information on the roles of former Homestore CEO Stuart Wolff, these people say.
Separately, the three defendants have agreed to a settlement of parallel charges filed Wednesday by the Securities and Exchange Commission ( news – web sites).
Prosecutors say Homestore paid $49 million for bogus software licenses and other services from technology companies. These companies then bought advertising worth $45 million from a ”major media company.” That company was AOL, people familiar with the situation say. In turn, AOL bought ads for itself or as a broker for other advertisers on Homestore.
Homestore recorded $36.7 million of the ad sales, effectively ”buying” revenue, Justice says in a court filing. It also improperly recorded payments to the advertisers as capital expenses, cutting its costs.
AOL spokesman John Buckley says, ”Our dealings with Homestore were legitimate and were accounted for properly.”
Giesecke will fully cooperate with the probes and ”hopes to make amends for his past mistakes,” says his attorney, Jan Handzlik.
DeSimone is charged with selling $170,000 in Homestore stock options before the bogus transactions were disclosed. Giesecke and DeSimone each face up to 10 years in prison. Shew faces five years.
The SEC complaint is broader, also charging that the former executives engaged in similar deals valued at $9.6 million with a second media company. Under the SEC settlement, Giesecke and Shew have agreed to pay shareholders $4.4 million for their illegal stock sales. Giesecke must pay a $360,000 civil penalty.